Evenlode Income fund manager Hugh Yarrow has hit out at the “arbitrary” classification of the Investment Association UK Equity Income sector, as his fund is booted from the sector.
The £400m fund needed to return an average yield of 3.8 per cent for the year ending 29 February, but instead it narrowly missed the requirement, returning 3.7 per cent.
It will now move to the UK All Companies sector on 1 June.
Yarrow describes the Investment Association Equity Income sector as the Evenlode Income fund’s “natural home”.
“The move is purely driven by the fund narrowly failing a somewhat arbitrary sector classification definition,” Yarrow says.
Evenlode will not change its approach to the fund, Yarrow says, adding that an income fund “works best when it delivers a balance between income today and income growth in the future”.
“Investors may inadvertently place pressure on management teams to ‘place the cart before the horse’ by prioritising dividends above organic investment in the future – investment necessary to drive long-term dividend growth,” he adds.
Yarrow says investors are also at risk of “reaching too high” for yield.
“If a fund’s target yield is too high, it may create a bias towards a handful of high yielding stocks for which dividend growth prospects are low and the risk of dividend cuts is high.”
Last month the Investment Association announced it was running a consultation on its classification of the UK equity income sector after a number of major funds were removed.
Mark Barnett of Invesco Perpetual and Kevin Murphy and Nick Kirrage of Schroders had previously been banished to the UK All Companies sector, while the Rathbones Income Fund was removed shortly after the consultation launched.
In response to the Investment Association consultation on the sector, Yarrow says he prefers the option for “better and more consistent disclosure relating to income delivery” and to remove any hard yield hurdle.
However, if a hard yield requirement remained, Yarrow says he would be favour it being calculated from the mean rather than the weighted average to avoid index constituents with “unsustainably high” dividend yields.
Regardless of the outcome of the consultation, Yarrow believes the fund will be reinstated to the sector.
In June, Evenlode will also be introducing a new disclosure to its factsheet, which will reveal how much an investor would have made from £100 in the fund over a five-year period.
The fund would have returned £23.94 over this period, compared to £18.80 for the UK market.